Overview

The Government intends to introduce a register of beneficial owners of overseas entities which own land in the UK (the Register) by 2021.

The Register will be held and maintained by Companies House and will, for the most part, be public. Increased consistency is envisioned between the requirements placed on UK companies and those imposed on overseas entities.

Transparency and tackling corruption remain the key drivers for the Government in introducing the Register. Overseas entities are used often to conceal and launder the proceeds of bribery, corruption and organised crime, and investigations are hampered by a lack of information as to the ultimate ownership and control of those entities.

To enforce compliance with the new regime, the Government plans to use a combination of what it describes as "novel land registration requirements" and criminal sanctions (including significant fines and up to five years imprisonment).

The land registration requirements will involve adding a restriction to the registered title of property owned by an overseas entity and preventing registration of transactions where an overseas entity has not complied with the regime.

On 23 July 2018, the Government published a draft Registration of Overseas Entities Bill (the draft Bill), explanatory notes, an overview document and an impact assessment (see the Government page containing these documents). The Register is a measure introduced in the draft Bill.

The Government is seeking views on the practical implementation of the Register. The consultation closes at 5 pm on 17 September 2018.

Procurement

The Cabinet Office is leading an assessment of how beneficial ownership information for overseas entities involved in UK central Government procurement is presented, but this falls outside the scope of the draft Bill. However, it has been decided that this beneficial ownership information will be required as a condition of awarding Government contracts that meet certain conditions or thresholds.

Detail

An overview of some points of note from the draft Bill and the accompanying documents are set out below:

Who must Register?

Overseas entities which own land in the UK will need to register.

The term "overseas entity" has been given a wide definition in the draft Bill and means a legal entity that is governed by the law of a country or territory outside the UK.

A "legal entity" is defined as a body corporate, partnership or other entity that (in each case) is a legal person under the law by which it is governed.

A "registered" overseas entity is defined as an overseas entity whose name appears on the Register.

What must overseas entities do?

Under the draft Bill, overseas entities must take reasonable steps to identify their "registrable beneficial owners" and obtain the information about them specified in the draft Bill. For example, where a registrable beneficial owner is an individual, the required information will include the name, date of birth and nationality of that individual and their usual residential address (although not all information will be available for inspection).

The draft Bill provides for overseas entities to serve an "information notice" on any person that it knows, or has reasonable cause to believe, is a registrable beneficial owner in relation to the entity or any person who they believe will enable them to identify a beneficial owner.

The draft Bill allows for a period of one month for a person to respond to an information notice. It will be an offence for a person, without reasonable excuse, to fail to comply with such a notice, to make a statement knowing it to be false in a material particular, or to recklessly make a statement that is false in a material particular. A person found guilty of such an offence will be liable to imprisonment for a maximum term of two years or a fine (or both).

In certain circumstances, if, for example, an overseas entity cannot provide complete information about its registrable beneficial owners, information about its managing officers will be required instead.

Who is a registrable beneficial owner?

A "beneficial owner" can be an individual, a legal entity or a Government or public authority. The draft Bill provides that a person (X) is a "beneficial owner" of an overseas entity or other legal entity (Y) if one or more of the following conditions are met:

Condition one is that X holds, directly or indirectly, more than 25% of the shares in Y.

Condition two is that X holds, directly or indirectly, more than 25% of the voting rights in Y.

Condition three is that X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of Y.

Condition four is that X has the right to exercise, or actually exercises, significant influence or control over Y.

Condition five is that (a) the trustees of a trust, or the members of a partnership, unincorporated association or other entity, that is not a legal person under the law by which it is governed meet any of the conditions specified above (in their capacity as such) in relation to Y, and (b) X has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or entity.

Once a beneficial owner has been identified, the draft Bill only requires those that are "registrable" to appear on the Register. It is possible for a person to be a beneficial owner, but not to be registrable. To work out whether an individual, a legal entity or a Government or public authority is a registrable beneficial owner, the relevant test in Schedule two (at paras. two, three or four) of the draft Bill must be applied.

The draft Bill includes further detailed provisions in relation to the above and the regime is modelled on the "People with Significant Control" (PSC) regime for UK companies.

Are there any alternative routes to compliance/ exemptions for certain types of overseas entities?

The draft Bill grants the Secretary of State the power to modify the provisions for certain overseas entities where the "Secretary of State considers that the modifications are appropriate in light of the information that is publicly available" elsewhere. The explanatory notes which accompany the draft Bill suggest (at para. 69) that this may be applicable:

"in relation to overseas entities that are already providing beneficial ownership information to a register in their own country of formation and the UK Government considers that register to be equivalent to the overseas entities register."

The overview document which accompanies the draft Bill notes (at para. 22) that where the requirements have been modified, an overseas entity would still have to become registered but the information it may have to provide in order to do so may be changed or reduced.

The draft Bill also allows for the Secretary of State to exempt certain overseas entities which own land from the requirements of the Register.

The overview document (at paras. 19-21) invites views on whether foreign Governments or public authorities should be exempt where they are, themselves, the owners of land in the UK. However, where a foreign Government or public authority is the beneficial owner of an overseas entity which owns land in the UK, the overview document indicates that, in those circumstances, it will be registered as a beneficial owner in relation to that overseas entity’s entry in the Register.

The overview document makes it clear (at para. 18) that an overseas entity that is exempt will be able to engage in land transactions without having to be on the Register.

Where will the information be held?

Companies House will maintain the Register.

The Register will be public (although not all information will be available for inspection). Once registered, overseas entities will receive an "overseas entity ID" from the Registrar of Companies. The explanatory notes state (at para. 46) that the intention "is that the overseas entity ID will be a similar concept to the registered number of UK companies" and that it will be a "permanent ID".

Unlike the PSC regime, overseas entities will not be required to keep their own registers.

How often will the information need to be updated?

The information will need to be updated annually. An overseas entity will have 14 days within which to deliver the updated information.

The first period of 12 months will commence on the date of registration of the overseas entity and the updating duty will apply every 12 months thereafter.

An overseas entity may choose to update before the end of the update period and (according to para. 49 of the explanatory notes) an early update "has the effect of re-setting the clock in respect of when the next update is due."

Both the overseas entity and its officers will commit an offence if they fail to keep the information updated. In relation to continued contravention, an offence is also committed by every officer of a registered overseas entity who, although they did not personally commit an offence in relation to the initial contravention, is in default in relation to continued contravention.

The failure of an overseas company to comply with its updating duty will also have consequences in terms of its ability to make dispositions of registered land. These are explored in greater detail in the section entitled"How will a failure to comply affect property ownership?" See below.

How will a failure to comply affect property ownership?

The draft Bill contains provisions which will amend the Land Registration Act 2002 (LRA 2002). Similar amendments will be made to the relevant legislation in Scotland and Northern Ireland.

The amendments will give rise to a significant change in practice for overseas entities which own registered land in England and Wales and for those third parties which deal with them. Conducting searches of the Register will become standard conveyancing practice in transactions involving overseas entities.

In relation to England and Wales, the draft Bill provides that:

No application may be made to register an overseas entity as the proprietor of a "qualifying estate" (namely, a freehold estate or a leasehold estate granted for a term of more than seven years) unless, at the time of the application, the entity is a registered overseas entity or an exempt overseas entity. In effect, an overseas entity will be unable to obtain legal title to registered land unless it has complied with the new regime.

Where an overseas entity already owns or becomes a registered proprietor of a qualifying estate, the registrar will be required to enter a restriction on the registered title of the qualifying estate preventing the registration of any disposition by an overseas entity unless:

(a) the entity is a registered overseas entity, or is an exempt overseas entity, at the time of the disposition

(b) the disposition is made in pursuance of a statutory obligation or court order

(c) the disposition is made in pursuance of a contract made before the restriction is entered in the Register, or

(d) the disposition is made in the exercise of a power of sale or leasing conferred on the proprietor of a registered charge or a receiver appointed by such a proprietor.

The restriction will be entered on existing titles where the overseas entity became the registered proprietor pursuant to an application made on or after 01 January 1999.

Dispositions to which the draft Bill apply are the transfer of land, the grant of a lease of more than seven years and the creation of a charge on the land.

A "registered" overseas entity is defined in the draft Bill as an overseas entity whose name appears on the Register. But the draft Bill also states that an overseas entity that fails to comply with its updating duty is not to be treated as being a "registered overseas entity" for the purposes of the LRA 2002 until it remedies the failure. As a result, a registered overseas entity can only make a disposition that is able to be registered at the Land Registry if, at the date of the disposition, it has complied with its updating duty.

The registration restrictions contained in the draft Bill cannot be avoided by an overseas entity failing to register and then seeking to make a disposition without being registered. Unless criteria similar to that set out in sub-paragraphs (a) - (d) above apply (the only difference being that the disposition is made in pursuance of a contract made before the overseas entity became entitled to be registered), such a disposition will not be able to be registered at the Land Registry.

It will be an offence for an overseas entity and its officers to make any disposition of a qualifying estate that cannot be registered. A person found guilty of such an offence will be liable to imprisonment for a maximum term of five years or a fine (or both). The explanatory notes explain (at para. 185) that "this is the most serious offence in the Bill."

The explanatory notes provide (at para. 183) that if an overseas entity that is not exempt makes a disposition at a time when it is not a registered entity (and no exception applies), while the disposition will not be capable of registration and the entity will have committed an offence, the validity of the disposition will not be affected. If the disposition cannot be registered at the Land Registry, there is the theoretical risk (which is noted at para. 32 of the overview document) "that the land becomes “locked-out” of ever being able to be registered." This is obviously likely to cause significant difficulties and concerns to any party dealing with an overseas entity. The overview document states (at para. 34) that:

"Such cases are expected to be very rare, because conveyancers and other professionals involved in land transactions conduct due diligence checks that would highlight that an overseas entity is either not registered, or has not complied with update requirements, and is therefore prohibited from making dispositions in relation to the land which cannot be registered."

However, the overview document raises (at question 6.1) the prospect of an "appeal" to the Secretary of State in this situation and seeks responses. Provisions relating to such an appeal are not currently included in the draft Bill.

How will the Register affect lenders?

The draft Bill will affect lenders which provide financial accommodation to overseas entities which are, or should be, registered on the Register.

It will be essential for lenders to check that borrowers which are overseas entities both appear on the Register and have complied with their updating obligations. Evidence of this is likely to become a condition precedent to facility agreements. Ongoing compliance by borrowers with their updating obligations will also need to be addressed in facility agreements, although this may be dealt with by the wider "compliance with laws" provisions.

It appears that the exercise of a mortgagee’s remedies will not require any additional registration by a lender. The relevant provision of the draft Bill (which, as noted above, takes effect by an amendment to the LRA 2002) states that a restriction entered on the register of title will not restrict a disposition which:

"is made in the exercise of a power of sale or leasing conferred on the proprietor of a registered charge or a receiver appointed by such a proprietor."

There is no clear exception for a sale by an administrator of an overseas entity which is a body corporate (in certain circumstances, an overseas company may be subject to English insolvency procedures).

Reassuringly for lenders, the concept of an "accredited or legitimate lender" which, alone, is capable of exercising enforcement remedies does not appear in the draft Bill. The Government had originally suggested (at para. 120 of the call for evidence) that such a requirement might be introduced to prevent beneficial owners taking a charge over the land, and then enforcing its mortgagee’s remedies, to circumvent the registration requirements. However, following consultation, the Government conceded that it would be impracticable to create and implement such a concept (as acknowledged in para. 55 of the Government’s response to the call for evidence) and the proposal does not feature in the draft Bill.

The Government’s call for evidence also suggested (at para. 119) that "new lending" secured against land would not be possible where the overseas entity had not complied with the requirements of the new regime, although it stated that it would need "to ensure that existing lenders are not disadvantaged." Lenders will be comforted by the fact that the Government’s response to the call for evidence did not address this point and that such an additional sanction for non-compliance, which would affect both borrowers and lenders, does not feature in the draft Bill.

Are there any transitional provisions?

Yes. Overseas entities which already own land in England and Wales (and which became the registered proprietor of that land pursuant to an application made on or after 01 January 1999) will have a transitional period of 18 months from the date the draft Bill comes into force within which to decide whether to disclose or dispose. This is a longer period than the period of 12 months proposed in the original call for evidence.

Comment

The consultation seeks views on the practical implementation on some of the points raised in the table above. However, the proposals are clearly at an advanced stage and whilst there may be the opportunity to fine tune some of the detail, the principles appear set and currently seem to have momentum for the proposed 2021 implementation date.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.